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Optimal Taxation and Social Insurance in a Lifetime Perspective

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  • Lans Bovenberg
  • Peter Birch Sørensen

Abstract

Advances in information technology have improved the administrative feasibility of redistribution based on lifetime earnings recorded at the time of retirement. We study optimal lifetime income taxation and social insurance in an economy in which redistributive taxation and social insurance serve to insure (ex ante against skill heterogeneity as well as disability risk. Optimal disability benefits rise with previous earnings so that public transfers depend not only on current earnings but also on earnings in the past. Hence, lifetime taxation rather than annual taxation is optimal. The optimal tax-transfer system does not provide full disability insurance. By offering imperfect insurance and structuring disability benefits so as to enable workers to insure against disability by working harder, social insurance is designed to offset the distortionary impact of the redistributive labor income tax on labor supply.

Suggested Citation

  • Lans Bovenberg & Peter Birch Sørensen, 2006. "Optimal Taxation and Social Insurance in a Lifetime Perspective," CESifo Working Paper Series 1690, CESifo.
    • Handle: RePEc:ces:ceswps:_1690
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    References listed on IDEAS

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    1. Bovenberg, A.L. & Hansen, M. & Sorensen, P.B., 2008. "Individual savings accounts for social insurance : Rationale and alternative designs," Other publications TiSEM 72e236b0-ad63-4bea-a314-6, Tilburg University, School of Economics and Management.

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    More about this item

    Keywords

    optimal lifetime income taxation; optimal social insurance;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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